Farmers & Fishermen |
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Large Gains, Lump-sum Distributions, etc. |
Penalty Questions
Estimated quarterly income taxes for a corporation were not paid. What is the penalty amount? Is there any way to reduce the penalty?
If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. The penalty is figured separately for each installment due date. The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. This is true even if the corporation is due a refund when its return is filed.
Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and, if so, the amount of the penalty.
If the corporation is charged a penalty, the amount of the penalty depends on the following three factors:
- The amount of the underpayment.
- The period during which the underpayment was due and unpaid.
- An interest rate that is published quarterly by the IRS in the Internal Revenue Bulletin.
The penalty may be waived by IRS on a case-by-case basis if the failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance.
For more information, refer to Publication 542, Corporations and the Form 2220 Instructions
References:
Is an S-Corporation required to pay quarterly estimated tax?
Generally, the corporation must make estimated tax payments for the following taxes if the total of these taxes is $500 or more:
- the tax on certain capital gains,
- the tax on built-in gains,
- the excess net passive income tax, and
- the investment credit recapture tax.
For more information regarding estimated tax, refer to Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation, page 4 and Publication 542, Corporations.
References:
How do partnerships file and pay quarterly estimated tax payments.
Partnerships file Form 1065, U.S. Partnership Return of Income, to report income and expenses. The Partnership passes the information to the individual partners on Schedule K-1, Form 1065. The partners report the information and pay any taxes due on Form 1040. Because partners are not employees of the partnership, no withholding is taken out of their distributions to pay the income and self-employment taxes on their Forms 1040. The partners may need to pay Estimated Tax Payments using Form 1040ES Refer to Instructions for Form 1065, U.S. Partnership Return of Income and Publication 505, Tax Withholding and Estimated Tax.
References:
Most of my income is from farming. Are there any special provisions related to estimated tax payments for farmers?
If you have income from farming, you may be able to avoid making estimated tax payments by filing your return and paying the entire tax due on March 1 of the year your return is due. If March 1 falls on a weekend or legal holiday, you have until the next business day to file and pay tax. This estimated tax rule generally applies if at least 2/3 of your total gross income is from farming this year. Refer to Publication 505, Tax Withholding and Estimated Tax, and Tax Topic 416, Farming and Fishing Income, for additional information.
References:
What can I do to make sure I will not owe the IRS on my 2001 income tax return?
You can either increase the amount of income tax withheld from your pay or make estimated tax payments for 2001. You may change the amount of income tax withheld from your pay by filing a new Form W-4, Employee's Withholding Allowance Certificate. Form 1040ES, Estimated Tax for Individuals, has a worksheet to see if you need to make estimated tax payments. For more details, refer to Tax Topic 355, Estimated Tax, or Publication 505, Tax Withholding and Estimated Tax.
References:
How do I know if I have to file quarterly individual estimated tax payments?
Estimated tax payments can be used to pay federal income tax, self-employment tax, and household employment tax. To estimate if you need to pay tax on income not subject to withholding or on other income from which not enough tax is withheld, you need to calculate if the total tax you'll owe on your annual income tax return will be covered by the amount of tax you have already had either:
- withheld from wages and other payments, or
- paid in earlier estimated payments for the year, or
- credited to your account from adjustments or overpayments to previously filed returns.
Generally, you should make estimated tax payments if you will owe tax of $1,000 or more, after withholding and credits, and the total amount of tax withheld and your credits will be less than the smaller of:
- 90% of the tax to be shown on your tax return, or
- 100% of the tax shown on your prior year's tax return, if your prior year's tax return covered all 12 months of the year. However, if your prior year's adjusted gross income exceeded $150,000, or $75,000 if you filed a separate return from your spouse, then you must pay 110% instead of 100% of last year's tax. (Note: the percentages change depending on the tax year. Refer to Publication 505, Tax Withholding and Estimated Tax.)
Estimated tax requirements are different for farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules and about estimated tax in general. Get Form 1040ES, Estimated Tax for Individuals, to help you figure your estimated tax liability for 2001.
References:
How do I calculate the amount of estimated tax I will owe?
You should get Form 1040ES, Estimated Tax for Individuals, to help you figure your estimated tax liability.
References:
Are all the quarterly estimated tax payments the same amount?
Normally, you determine your tax at the first of the year and divide by 4 but this can change as your income may change for a certain quarter. If your income fluctuates during the year, you should complete the 2001 Annualized Estimated Tax Worksheet in Publication 505, Tax Withholding and Estimated Tax. The worksheet annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred since the beginning of the tax year through the end of the period. Use the result you figure on line 26d to make your estimated tax payments and complete your payment-vouchers.
References:
Do self-employment taxes need to be paid quarterly or yearly?
Self-employment tax is paid by making quarterly estimated tax payments which include both income tax and social security tax.
References:
What form will I use to make estimated payments?
Use Form 1040ES, Estimated Tax for Individuals, to estimate your tax liability.
References:
Can I combine my estimated tax payment with the payment for my Form 1040?
Estimated tax payments should not be sent with or be included in checks or money orders for payment of federal income tax with your return. Mail your estimated tax payments separately to the address shown in the Form 1040ES. For additional information on ensuring proper credit of payments, refer to Tax Topic 158, Ensuring Proper Credit of Payments.
References:
When are the quarterly estimated tax returns due?
Your first estimated tax payment is usually due the 15th of April. You may pay the entire year's estimated tax at that time, or you may pay your estimated tax in four payments. The four payments are due April 15th, June 15th, September 15, and January 15th of the following year.
If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday. For example, a payment due Sunday, April 15, 2001, will be on time if you make it by Monday, April 16, 2001.
References:
Where do I send my individual estimated tax payments?
Where you send your individual estimated tax payments depends on where you live. Refer to Form 1040-V, Payment Voucher, for the correct mailing address.
References:
How do I report the estimated payments I have made when I file my taxes at the end of the year?
Take credit for all your estimated tax payments for 2001 on line 60 of Form 1040, U.S. Individual Income Tax Return, or line 38 of Form 1040A, U.S. Individual Income Tax Return.
References:
Can I make my quarterly individual estimated tax payments by credit card?
You can generally pay part or all of your estimated tax by using a credit card (American Express Card®, MasterCard®, or Discover Card®). There are two credit card processors (also referred to as service providers) which offer this service: Official Payments Corporation and PhoneCharge, Inc. Both providers will charge you a convenience fee using a tiered fee schedule which can be found on their web sites. The IRS will not receive this fee. You can look up the amount of the convenience fee. The amount of the convenience fee is based on tiered fee schedule which can be found on their web sites. The IRS will not receive this fee. You can look up the amount of the convenience fee at http://www.official payments.com or, if you choose to use PhoneCharge Inc., at http:/wwwAbout1888ALLTAXX.com.
By phone, Official Payments Corporation can be reached at 1-888-272-9829 (1-888-2PAY-TAX) toll-free. Similarly, you may call PhoneCharge, Inc. at 1-888-255-8299 (1-888-ALL-TAXX). You will be told the amount of the convenience fee during the call. Then, you will have the option to continue or cancel the call. If you decide to continue, you will be given a confirmation number at the end of the call. Make a record of the confirmation number. Do not include the amount of the convenience fee as part of the estimated tax payment. There is nothing to send in when you pay by credit card.
I'm concerned because my check payment to the IRS has not been cashed yet. What should I do?
You may call 800-829-1040 and ask an IRS representative if the payment has been credited to your account. If it has not, you may choose to place a stop-payment on the original check and reissue the payment.
I was self-employed for the first half of the year and made estimated tax payments. Now, I am a wage earner and my employer withholds taxes. Must I continue to make estimated tax payments?
In general, you may owe a penalty for 2001 if the total of your withholding and estimated tax payments did not equal at least the smaller of:
- 90% of your 2001 tax, or
- 100% of your 2000 tax. (Your 2000 tax return must cover a 12-month period.)
If your timely and correct Estimated Tax payments plus the Federal Withholding from your wages meet the Estimated Tax Requirements shown above, you will not need to make any additional payments for Estimated Tax, nor will you need to inform the IRS of the change.
References:
I filed a quarterly 1040ES in April and paid the difference between my total tax bill last year and this year's withholdings. Therefore, I believe I have paid the minimum amount of estimated tax payments. Do I have to submit a Form 1040ES for the, second, third, and fourth quarters?
Since you have paid 100%* of your prior year income tax liability, you will not be subject to the failure to pay estimated tax penalty. However, not making estimated tax payments may mean that you have a large income tax liability when you do file your income tax return.
(*If you are a higher income taxpayer (with an AGI of more than $150,000 ($75,000 if your filing status is married filing separate)), substitute 110% for 100%.) (if last year is 2000) (Note: the percentages change depending on the tax year. Refer to Publication 505, Tax Withholding and Estimated Tax.)
References:
Is there a way to have federal income tax withheld from unemployment compensation, in lieu of making estimated tax payments?
You may have federal income tax withheld from unemployment compensation by filing Form W-4V, Voluntary Withholding Request. For additional information on unemployment compensation, refer to Tax Topic 418, Unemployment compensation.
References:
I received a lump-sum distribution from a retirement account, but no taxes were withheld. How do I determine whether estimated taxes should be paid?
You should get Form 1040ES, Estimated Tax for Individuals, to help you figure your estimated tax liability. Since this situation involves a lump-sum distribution, you may qualify for the five-year or ten-year tax option. Lump-sum distributions must meet specific requirements to qualify for optional tax treatment. The election to use either option can be made only once after 1986 by a participant born before 1936. However, beginning in 1995, a participant born after 1935, who has reached age 59 1/2 at the time the distribution is made, may be able to use the 5-year tax option. Thus, you may also need Form 4972, Tax on Lump-Sum Distributions, to make an accurate estimate of your income tax liability.
References:
I will be taking a Required Minimum Distribution (MRD) at the end of the year on my IRA. Is estimated tax due when the distribution is made or is 1/4th due with each estimated tax submission?
The tax on the distribution is not due until you actually receive the income. Thus, your last fourth quarter estimated tax payment should reflect the increase in your tax liability. You could still increase your quarterly estimated tax payments or increase your federal income tax withholding during the earlier part of the year to cover the tax liability.
If you have the proper amount withheld, you may not be required to make estimated tax payments nor have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as you would if you just increased the last estimated tax payment). If you wait and make an increased estimated tax payment for the fourth quarter, you would have to file Form 2210 with your tax return because we assume you receive the income evenly throughout the year. Since you really did not, you would have to tell us that by filing Form 2210.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
If I anticipate a sizable capital gain on the sale of an investment during the year, do I need to make a quarterly estimated tax payment during the tax year?
If you first have income subject to estimated tax during a period other than the first quarter, you must make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods.
You could still increase your quarterly estimated tax payments or increase your federal income tax withholding during the earlier part of the year to cover the tax liability. If you have the proper amount withheld you may not be required to make estimated tax payments nor have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as you would if you just increased the remaining estimated tax payments). If you wait and make increased estimated tax payment in the later quarters, you would have to file Form 2210 with your tax return because we assume you receive the income evenly throughout the year. Since you really did not, you would have to tell us that by filing Form 2210.
References:
If I sell stock at a gain, do I pay estimated taxes on the entire profit when the next quarterly payment is due or can I divide it by the number of quarterly payments left for the year and make these equal payments at each subsequent quarter?
If you first have income subject to estimated tax during a period other than the first quarter, you must make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods.
References:
Since mutual fund distributions are typically made in the last quarter of a calendar year, is it sufficient to pay income taxes on the distributions by January 15th, or am I required to make quarterly estimated tax payments?
You do not have to make estimated tax payments until you have income on which you will owe the tax. Since your mutual fund distributions are not made until the last quarter of the year, you need only make an estimated tax payment on them in your January 15th estimated tax payment. However, even if you make an adequate payment of tax by January 15th, you may be assessed an estimated tax penalty by the IRS service center when your return is processed. This is because estimated tax payments are normally made in four equal installments and the IRS will not know your liability occurred in the fourth quarter. Therefore, you should also complete Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and attach it to your income tax return when you file it. You should check the box on the front page of the Form 2210 to select the Annualized Income Installment method, and then complete Schedule AI on page 3. When you compute the penalty on page 2 of that form using the numbers from Schedule AI, your penalty will be $0. Even if you did not make the January 15th payment, the annualized income method on Form 2210 may significantly reduce the estimated tax penalty if the income for which there was no prepayment of tax was earned in the third or fourth quarters of the year.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
On December 20, I received a large mutual fund distribution. Due to the large distribution I'm going to owe $7,000 when I file my return. Is it okay to just pay the $7,000 when I file my return?
If the $7,000 in tax is a result of a distribution not covered by prepayments of tax, either through income tax withholding or estimated tax payments, you should make an estimated tax payment by January 15th of the next year. If you wait to pay the $7,000 with your return, you may be penalized for an underpayment of estimated taxes. Even if you make an adequate payment of tax by January 15th, you may be assessed an estimated tax penalty by the IRS service center when your return is processed. This is because estimated tax payments are normally made in four equal installments and the IRS will not know your liability occurred in the fourth quarter unless you file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts.
You may be subject to the penalty if you owe at least $1,000 in tax after subtracting your withholding from your tax liability, and you did not prepay at least 90% of your current year's tax or 100% of your previous year's tax. (The latter percentage is higher for higher-income taxpayers with adjusted gross incomes from the previous year of more than $150,000.)
If you make an adequate payment by January 15th but made no earlier estimated tax payments, use Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, to compute your penalty. Check the box on the front page selecting the Annualized Income Installment method, and then complete Schedule AI on page 3. When you compute the penalty on page 2 of that form using the numbers from Schedule AI, your penalty will be $0. Even if you did not make the January 15th payment, the annualized income method on Form 2210 may significantly reduce the estimated tax penalty if the income for which there was no prepayment of tax was earned in the third or fourth quarters of the year.
For more information on estimated tax payments and the underpayment of estimated tax penalty, refer
to Publication 505, Tax Withholding and Estimated Tax.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
What is the minimum amount of estimated tax that I am required to pay without incurring any penalty or interest charges?
In general, you may owe a penalty for 2001 if the total of your withholding and estimated tax payments did not equal at least the smaller of:
- 90% of your 2001 tax, or
- 100% of your 2000 tax. (Your 2000 tax return must cover a 12-month period.)
Your 2001 tax, for this purpose, is your Total tax for 2001. There are special rules for farmers and fishermen, and for certain higher income taxpayers.
Generally, you do not have to pay an underpayment penalty if either of the following conditions apply:
- Your total tax is less than $1,000, or
- You had no tax liability last year.
Farmers and fishermen. If at least two-thirds of your gross income for 2000 or 2001 is from farming or fishing, substitute 66 2 /3% for 90% in (1) above.
Higher income taxpayers. If less than two-thirds of your gross income for 2000 and 2001 is from farming or fishing and your adjusted gross income (AGI) for 2000 was more than $150,000 ($75,000 if your filing status is married filing a separate return in 2001), substitute 110.9% for 100% in (2) above.
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What is meant by "no tax liability" in the exceptions to the estimated tax penalty?
The exception to the estimated tax penalty for having "no tax liability last year" means that your total tax for the prior year is zero or you did not need to file an income tax return. Your total tax is found on page 2, line 53 of Form 1040, U.S. Individual Income Tax Return, above the calculation of the amount of your refund. If you got a refund of only part of your withholding, then you had a tax liability for the prior year.
For additional information on this topic refer to Form 1040ES, Estimated Tax for Individuals, and Publication 505, Tax Withholding and Estimated Tax.
References:
I was a student in 2000 and had no income. In 2001, I started working and did not have enough tax withheld. Will I owe a penalty because I did not make estimated tax payments?
You will not have to pay a penalty for 2001 if you did not owe tax for 2000. For additional information on the penalty for underpayment of estimated tax, refer to Tax Topic 306, Penalty for Underpayment of Estimated Tax. For information on how to increase the amount of tax withheld by your employer, refer to Tax Topic 753, Form W-4, Employee's Withholding Allowance Certificate. For information on estimated tax requirements, refer to Tax Topic 355, Estimated Tax or Publication 505, Tax Withholding and Estimated Tax.
References:
I was late mailing my estimated tax payment. To minimize the penalty, how do I compute the interest rate and late payment charges in order to send an additional check to the IRS as soon as possible?
The failure to pay estimated tax penalty is based upon the number of days that the payment is late and the current interest rate. Therefore, we cannot give a percentage that applies for all cases. To compute the amount of the estimated tax penalty you will need to refer to Publication 505, Tax Withholding and Estimated Tax and Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts for directions on computing the penalty. Since the computations can get rather complicated, you may want to just send in the estimated tax payment and wait for a bill from us for the interest and penalty.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
Why should I owe a penalty for failing to pay estimated taxes when I received a refund for the prior year?
Since the estimated tax penalty is based upon your prior or current year income tax liability (not withholding or estimated tax payments), you may be subject to the penalty even if you had a refund for your prior year return.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
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